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BLOG: Farm Divorce 101: A Practical Guide – Part 2

Posted on Wednesday, January 27, 2016 at 7:03 AM by Brad Holbrook

In Nebraska, and most likely in most other surrounding states, we have seen a considerable increase in the net worth of producers over the last several years.  Although various factors impact the net worth of producers, in my opinion, the variable that has had the largest impact on net worth has been the surge in per acre valuations.  Although land values have leveled off and in some areas land values have started to decline, the impact of the increase in values on those involved in a divorce action will continue to be felt for quite some time through the application of a Grace Award. 

In order to understand the correlation between  the increasing value of agricultural real estate and the application of a Grace Award, you need to understand not only what it is, but the purpose behind the Grace Award.  The award is named from the case in which it was first utilized by the Nebraska Supreme Court in Grace v. Grace, 221 Neb. 695 (1986).  In that case, the Nebraska Supreme Court first recognized the equitable principal that permits a court to award a spouse a percentage of non-marital/pre-marital assets of an agricultural producer.  Stated differently, the value of an asset of the producer which was either owned by the producer prior to marriage or inherited during the marriage, could be considered in dividing the marital estate.  This was a departure from the exclusion of pre-marital or non-marital assets in dividing the marital estate (although the existence of these assets may be a factor in assessing child support, alimony or attorney fees which was the law prior to Grace and continues to be the law since Grace).   As in Grace, and in the applications of the Grace case since 1986, the typical fact scenario is that of a farming couple, with a long term marriage, in which the major asset is an asset in which the other spouse does not have a marital interest.   Additionally, the producer-spouse  is employed by a family farming entity, in which he/she has an ownership interest which is non-marital/pre-marital,  the value of which is considerable in comparison to the overall value of the marital estate exclusive of the value of the non-marital/pre-marital ownership interest.  Although other factors are relevant in terms of whether the Grace Award applies or not, in this context, it is easy to understand why the increase in agricultural land values has made the Grace Award a common issue in farm divorces.  

If the issue of a Grace Award is raised and the trial court believes that equity mandates the application of the award, the trial court can consider the value of the non-marital/pre-martial asset in dividing the marital estate.  When doing so, the trial court is not provided any hard and fast guidelines in terms of how much to award, or how the award is paid to the non-producer spouse.  No such rules exist because the application of a Grace Award is based upon equity (i.e., what is “fair”) and any appellate review of the ruling will be a review of how the court exercised or abused its discretion.  The  result can be economically cumbersome to the producer as seen in the examples below. 

Q:  My spouse was farming and/or ranching before we were married, and already owned the real estate, machinery, equipment and/or livestock.  Does that matter?

A:  Yes and no.   Although premarital property is set aside to the spouse who owned the asset prior to the marriage, two exceptions have developed in which a court may consider the premarital property in dividing the marital estate.   {I discussed the first exception, Van Newkirk in my prior blog} (link)  The second exception is the Grace Award.   Let’s look at its application in using the same example from my first blog

                Ex. #1: Spouse has quarter section of dry land ground prior to marriage which abuts the home place in which outbuildings and the home sit.  Non-farming spouse does not work on the farm and instead is a W-2 wage earner.  During marriage, an irrigation well is installed and a power unit with a pivot is placed on the quarter section.  All of the costs associated with the well, power unit and pivot are paid for with proceeds from the sale of premarital grain which was harvested and stored in the bins with the resulting sale proceeds being reported on the joint state and federal tax return of the parties.  What is the effect of the installation of the well, power unit and pivot? 

                Answer:  In my prior answer touching solely on the Van Newkirk exception, I discussed the impact of the placement of the well, power unit and pivot increasing the value of the quarter section which was previously dry ground.  The Grace Award analysis may be a complicating factor in that it may be difficult to discern the increase in the land value due to the improvements (Van Newkirk) as opposed to the mere inflationary pressures which increased the value of the land.  If the increases can be separated, for instance a 5% increase each year in the value of the quarter section attributable solely to inflationary pressures (which we have certainly seen over the last decade, and in some instances the increase has been considerably more than 5% per year), then the court may be inclined to consider such an award, assuming all other factors indicate that it would be “fair” to include the increase in value in the marital estate.   Over a decade-long period, this inflationary increase can be drastic, such that I have observed in my practice quarter sections of farmland that were once valued at $320,000 now being valued at or near $1,250,000.  The problem in the farm setting is that the values of residential homes, retirement accounts (if any), personal vehicles and possessions (which typically account for the marital estate) have not kept pace. Accordingly, if the assets comprising the marital estate have appreciated at a slower rate than the pre/non-marital farming assets, then the ratio of the marital estate compared to the pre/non-marital estate has decreased,  which is a factor that the court can consider in utilizing the Grace Award.    In simple math, assume that the marital residence, retirement accounts, personal vehicles and possessions were valued at $400,000 ten years ago when the quarter section was valued at $320,000.  The ratio is considerably different 10 years later when the marital estate (assuming a 5% growth rate) is valued at $650,000 and the quarter section is now valued at $1,250,000.  The numbers themselves seem to indicate that the wealth of the family has increased, but the wealth of the marital estate has increased significantly less than the increase in wealth of the pre/non-marital assets.  It is in this scenario that the Grace Award impact is truly seen because now we have a “fairness” issue (ie. is it fair to give a spouse $325,000 when the other spouse is receiving $325,000 plus has pre/non-marital assets of $1,250,000).  If it is not “fair”, then what percentage of the $1,250,000 should the Court award to the non-producer spouse to make the dissolution fair? That is the legal question in which the Court must exercise its discretion. The financial  impact of this legal theory  is ultimately that families that otherwise would not be forced to obtain financing to equalize the marital estate  with  a non-producer spouse or to sell off a portion of the real estate holdings may be forced to do just that.  Until and unless the per acre valuations of farmland decrease further, or the personal marital  holdings of the farm family catches up with the land value increases, courts will continue to have to deal with the Grace Award issue.

 

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